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Item 8AGENDA ITEM NO.8 AGENDA STAFF REPORT City of West Covina I Office of the City Manager DATE: June 21, 2022 TO: Mayor and City Council FROM: David Carmany City Manager SUBJECT: CONSIDERATION OF SINGLE AUDIT REPORT FOR THE YEAR ENDED JUNE 30, 2021 RECOMMENDATION: It is recommended that City Council receive and file the Single Audit Report on Federal Award Programs for the year ended June 30, 2021. BACKGROUND: The City's Single Audit, previously known as the OMB Circular A-133 audit, is an organization -wide financial statement and federal awards' audit which is required when the City expends $750,000 or more in federal funds in one year. It is intended to provide assurance to the Federal Government that the City has adequate internal controls in place, and is generally in compliance with program requirements. The purpose of this report is solely to describe the scope of audit testing of internal control and compliance and the results of that testing. This report does not provide an auditor's opinion on the effectiveness of the City's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the organization's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. DISCUSSION: Single Audit Report on Federal Awards As a recipient of Federal grant funds in excess of $750,000, the City's Single Audit Report on Federal Awards is required to be submitted in compliance with the financial reporting requirement in accordance with Title 2, Code of Federal Regulations (CFR), Part 200 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). The Single Audit Report (Attachment No. 1) includes the following: Independent Auditor's Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards; Independent Auditor's Report on Compliance for Each Major Program; Report on Internal Control Over Compliance; and Report on the Schedule of Expenditures of Federal Awards Required by Uniform Guidance; Schedule of Expenditures of Federal Awards; Notes to the Schedule of Expenditures of Federal Awards; 5. Schedule of Findings and Questioned Costs; and 6. Summary Schedule of Prior Audit Findings. Internal Control Over Financial Reoortin As part of the Single Audit, the City's auditors considered the City's internal control over financial reporting to determine audit procedures that are appropriate in the circumstances for the purpose of expressing their opinions on the City's financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the City's financial statements will not be prevented or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. The auditors identified one deficiency in internal control over financial reporting that they considered to be a material weakness for the year ended June 30, 2021. Finding Number 2021-001 is related to the Housing Loans Receivable Administration (page 10 of Attachment No. 1). In response to this finding, the City submitted a Corrective Action Plan (Attachment No. 2). Additionally, staff is working to address this issue for fiscal year ending June 30, 2022. There were not any auditor findings to be reported in accordance with Uniform Guidance. Additionally, corrective action has been taken on all prior audit findings (five total). This report was also reviewed, received and filed by the Audit Committee June 9, 2022 Prepared by: Stephanie Sikkema, Finance Director Fiscal Impact FISCAL IMPACT: This agenda item is to receive and file, therefore; there is no fiscal impact associated with this action. Attachments Attachment No. 1 - Single Audit Report FYE 2021 Attachment No. 2 - Corrective Action Plan CITY COUNCIL GOALS & OBJECTIVES: Achieve Fiscal Sustainability and Financial Stability ATTACHMENT NO. 1 CITY OF WEST COVINA Single Audit Report on Federal Award Programs June 30, 2021 CITY OF WEST COVINA SINGLE AUDIT REPORT ON FEDERAL AWARD PROGRAMS Year Ended June 30, 2021 TABLE OF CONTENTS Page Independent Auditor's Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Independent Auditor's Report on Compliance for Each Major Program; Report on Internal Control Over Compliance; and Report on the Schedule of Expenditures of Federal Awards Required by Uniform Guidance Schedule of Expenditures of Federal Awards Notes to the Schedule of Expenditures of Federal Awards Schedule of Findings and Questioned Costs Summary Schedule of Prior Audit Findings 12 VLVan Lank Fankhanel, LLP Ce f,ed 1'ubhc A¢ou nta A d Independent Auditor's Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards City Council City of West Covina West Covina, California We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities, business -type activities, each major fund and the aggregate remaining fund information of the City of West Covina (City), as of and for the year ended June 30, 2021, and the related notes to the financial statements, which collectively comprise the City's basic financial statements, and have issued our report thereon dated February 22, 2022. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the City's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control. Accordingly, we do not express an opinion on the effectiveness of the City's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the preceding paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that have not been identified. We did identify a deficiency in internal control, described in the accompanying schedule of findings and responses as item 2021-001 that we consider to be a material weakness. Van Lant & Fankhanel, LLP 29970 Technology Drive, Suite 105 A Murrieta. CA 92563 909.856.6879 1 Compliance and Other Matters As part of obtaining reasonable assurance about whether the City's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. City of West Covina's Responses to Findings The City's responses to the findings identified in our audit are described in the accompanying schedule of findings and responses. The City's responses were not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on them. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the City's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the organization's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. z% r am, ilf February 22, 2022 2 Van Lant & VLF Fankhanel, LLP Cer❑Nl d Public Accountants Independent Auditor's Report on Compliance for Each Major Federal Program; Report on Internal Control Over Compliance; and Report on the Schedule of Expenditures of Federal Awards Required by Uniform Guidance City Council City of West Covina West Covina, California Report on Compliance for Each Major Federal Program We have audited the City of West Covina's compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of the City's major federal programs for the year ended June 30, 2021. The City's major federal programs are identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Management's Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance for each of the City's major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for FederalAwards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the City's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the City's compliance. Van Lant & Fankhanel, LLP 29970 Technology Drive, Suite 105 A Murrieta. CA 92563 909.856.6879 91 Opinion on Each Major Federal Program In our opinion, the City of West Covina, complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, 2021. Report on Internal Control Over Compliance Management of the City is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the City's internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the City's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. 4 Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance We have audited the financial statements of the governmental activities, business -type activities, each major fund, and the aggregate remaining fund information, of the City of West Covina, as of and for the year ended June 30, 2021, and the related notes to the financial statements, which collectively comprise the City's basic financial statements. We issued our report thereon dated February 22, 2022, which contained unmodified opinions on those financial statements. Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the basic financial statements. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by the Uniform Guidance and is not a required part of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated in all material respects in relation to the basic financial statements as a whole. May 6, 2022 5 CITY OF WEST COVINA SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year Ended June 30, 2021 Federal Grantor/Pass-Through Grantor/Program or Cluster Title Federal CFDA Number Program Identification Number Program E)pend- itures Provided to Sub- Recipients U.S. Department of Housing and Urban Development Passed Throug� the County of Kern CDBG - Entitlement Grants Cluster Community Development Block Grant 14.218 B-17-MC-06-0532 $ 194,592 $ - Community Development Block Grant 14.218 B-18-MC-06-0532 134,576 10,581 Community Development Block Grant 14.218 B-20-MC-06-0532 129,061 - COVID-19 - Community Development Block Grant 14.218 B-20-MW-06-0532 80,190 16,767 Total - CDBG Entitlement Grants Cluster 538,419 27,348 Total Department of Housing and Urban Development 538,419 27,348 U.S Department of Justice Direct Assistance: COVID-19 - Coronavirus Emergency Supplemental Funds 16.034 2020-VD-BX-1284 23,769 - Bulletproof Vest Partnership Program 16.738 2020-VD-BX-0264 17,856 - Equitable Sharing Program 16.922 CA1975 1,460,051 - TotalDepartmentofJustice 1,501,676 - U.S Department of Transportation Passed through the California Department of Transportation: Office of Traffic Safety: Highway Safety Cluster Selective Traffic Enforcement Program 20.600 402PT-20 14,525 - Selectve Traffic Enforcement Program 20.600 402PT-21 14,015 - Total Highway Safety Cluster 28,540 - Passed through the California Department of Transportation: Office of Traffic Safety: Minimum Penalties for Repeat Offenders for Driving While l ntobcated 20.608 164 AL-20 10,548 - Minimum Penalties for Repeat Offenders for Driving While l ntobcated 20.608 164 AL-21 18,318 - Total Department of Transportation 57,406 - U.S Department of Treasury Direct Assistance: Equitable Sharing Program 21.016 WA 657,512 - Passed through the County of Los Angeles COVID-19 - Coronavirus Relief Fund 21.019 WA 311,457 - Total Department of Treasury 968,969 - 11 CITY OF WEST COVINA SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS - Continued Year Ended June 30, 2021 Federal Program Program Provided Federal Grantor/Pass-Through CFDA Identification E)pend- to Sub- Grantor/Program or Cluster Tide Number Number itures Recipients U.S Department of Health and Human Services Passed Through the County of Los Angeles Aging Cluster Special Programs for the Aging, Title III, Part C 93.045 ENP202111 176,439 Nutrition Services Incentives Program 93.053 ENP202111 7,245 Total Aging Cluster 183,684 Direct Assistance: Provider Relief Fund General and Targeted Distribution Payments 93.498 3d8fl f41 c444 45,376 Total Department of Health and Human Services 229,060 U.S Department of Homeland Security Direct Assistance: Assistance to Firefighters 97.044 MW-2019-FG-05857 131,585 Passed Through the State of California, Office of Emergency Services Homeland Security Grant 97.067 EMW-2018-SS-00054 98,448 Homeland Security Grant 97.067 EMW-2019-SS-00054 43,501 Total Department of Health and Human Services 273,534 Total E)penditures of Federal Awards = Major Program $ 3,569,064 $ 27,348 7 CITY OF WEST COVINA NOTES TO THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year Ended June 30, 2021 1) Basis of Presentation The accompanying Schedule of Expenditures of Federal Awards (the Schedule) includes the federal award activity of the City of West Covina (the City) under programs of the federal government as well as federal financial assistance passed through other government agencies for the year ended June 30, 2021. The information in this Schedule is presented in accordance with the requirements of Title 2 U.S Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Because the Schedule presents only a selected portion of the operations of the City, it is not intended to and does not present the financial statements of the City. The City's reporting entity is defined in Note 1 of the notes to the City's financial statements. 2) Summary of Significant Accounting Policies Expenditures reported on the Schedule are reported using the modified accrual basis of accounting for governmental funds and the accrual basis for proprietary funds, which is described in Note 1 of the notes to the City's financial statements. Such expenditures are recognized following the cost principles contained in the Uniform Guidance and OMB CircularA-87, Cost Principles for State, Local, and Indian Tribal Governments, wherein certain types of expenditures are not allowable or are limited as to reimbursement. Pass through entity identifying numbers are presented when available. The City has elected to use the 10% de minimis indirect cost rate as allowed under the Uniform Guidance. 3) Outstanding Loans The City has made several housing rehabilitation loans to qualified applicants using Community Development Block Grants/Entitlement Grants (CFDA No. 14.218) funding. These loans bear interest up to 5% and are repaid when title to the property changes. There was one new loan funded in the current year. The outstanding balance of these loans at June 30, 2021 is $3,372,210. 4) Subrecipient Expenditures During the fiscal year ended June 30, 2021, the City made payments to subrecipients which consisted of the following: Assistance Leage of Covina Valley $ 6,000 ESGV Coalition for the Homeless 10,000 Housing fights Center 10,000 YWCA - Senior Citizen Assistance Program 1,348 Total Subrecipients $ 27,348 5) Major Programs The City had one major program for the year ended June 30, 2021, consisting of the Equitable Sharing Fund, which had total disbursements of $1,460,051. This amount calculates to 40.9% of the total disbursements from federal awards. W CITY OF WEST COVINA SCHEDULE OF FINDINGS AND QUESTIONED COSTS Year Ended June 30, 2021 SECTION I — SUMMARY OF AUDITOR'S RESULTS Financial Statements Type of Auditor's Report Issued: Internal Control Over Financial Reporting: Material Weakness(es) Identified? Significant Deficiencies Identified not Considered to be Material Weaknesses? Noncompliance Material to Financial Statements Noted? Federal Awards Internal Control Over Major Programs: Material Weakness(es) Identified? Significant Deficiencies Identified not Considered to be Material Weaknesses? Type of Auditor's Report Issued on Compliance for Major Programs: Any Audit Findings Disclosed that are Required to be Reported in Accordance With Uniform Guidance? Identification of Major Programs: CFDA Numbers 16.922 Name of Federal Dollar Threshold used to Distinguish Between Type A And Type B Programs: Auditee Qualified as Low -Risk Auditee? Unmodified Yes None reported No No None reported Unmodified No or Cluster Equitable Sharing Program $ 750,000 No CITY OF WEST COVINA SCHEDULE OF FINDINGS AND QUESTIONED COSTS Year Ended June 30, 2021 SECTION II — FINANCIAL STATEMENT FINDINGS 2021-001 Housing Loans Receivable Administration Condition: The City and Housing Authority have issued loans in prior years for first-time homebuyers and home improvement loans. The terms of these loans vary depending on the loan type and the period when it was issued. As part of our audit procedures, we selected various loans listed on the loans receivable schedule provided and reviewed the related promissory notes. Based on this review, we found that certain loans required periodic payments to be made throughout the year, however, it does not appear that the City has been receiving payments in accordance with the terms of the loan. In another instance, City staff were unable to provide the promissory note for the loan selected. In addition, one of the promissory notes reviewed indicates a 5% interest rate, charged annually, on the outstanding balance of the loan, however, through discussions with City staff, the City is not calculating and charging 5% per year. Criteria: In a strong internal control environment, procedures should be established to ensure the loans receivable schedule is properly maintained throughout the year, payments are collected and recorded in accordance with the applicable promissory notes, and proper records are maintained for all loans receivable balances. Cause of Condition: A large number of the first-time homebuyer and housing improvement loans were issued many years ago, in some cases 30+ years or more, and it does not appear that detailed administration and tracking of these loans has been done annually to ensure the loan balances are sufficiently tracked and accounted for each year. Potential Effect of Condition: The City may not be collecting the full value of the amounts due in accordance with the terms of the promissory note agreements. Recommendation: We recommend the City perform a detailed review of the loan balances and perform test recalculations of the interest balances on the loans to ensure the interest calculations are in accordance with the executed loan agreements and that payments are being collected in accordance with these agreements. Views of Responsible Officials: The City concurs. Refer to Separate Corrective Action Plan for management's response. 10 CITY OF WEST COVINA SCHEDULE OF FINDINGS AND QUESTIONED COSTS Year Ended June 30, 2021 SECTION III — FEDERAL AWARD FINDINGS AND QUESTIONED COSTS There were no auditor's findings to be reported in accordance with Uniform Guidance. 11 CITY OF WEST COVINA SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS Year Ended June 30, 2021 SECTION II — FINANCIAL STATEMENT FINDINGS Finding No. 2020-001— Internal Control Environment Current Status — Corrective action has been taken. Finding No. 2020-002 — Errors in Pension Census Data Current Status — Corrective action has been taken. Finding No. 2020-003 — Internal Control over Federal Grant Reporting Current Status — Corrective action has been taken. Finding No. 2020-004 — Purchasing Approvals Current Status — Corrective action has been taken. Finding No. 2020-005 — Bank Reconciliation Review Current Status — Corrective action has been taken. SECTION III — FEDERAL AWARD FINDINGS AND QUESTIONED COSTS There were no auditor's findings to be reported in accordance with the Uniform Guidance. 12 ATTACHMENT NO. 2 Corrective Action Plan Year Ended June 30, 2021 CITY OF WEST COVINA CORRECTIVE ACTION PLAN Year Ended June 30, 2021 Below is the City's Corrective Action Plan as it relates to the Findings and Questioned Costs identified during the audit for the fiscal year ended June 30, 2021. SECTION I — FINANCIAL STATEMENT FINDINGS 2021-001: Housing Loans Receivable Administration Management's or Departments Response: We concur. View of Responsible Officials and Planned Corrective Actions: The City will perform a detailed review of the loans to ensure the interest calculations and collections are done in accordance with the executed loan agreements. Additionally, the City will establish a process for updating loan balances moving forward. Name of Responsible Person: Stephanie Sikkema, Finance Director Implementation Date: June 30, 2022 Stephanie Sikkema Finance Director CITY OF WEST COVINA CORRECTIVE ACTION PLAN Year Ended June 30, 2021 SECTION II — FEDERAL AWARD FINDINGS AND QUESTIONED COSTS There were no auditor's findings to be reported in accordance with Uniform Guidance.